EUROPEAN EQUITY UPDATE: Stocks soft as geopolitics sits front of mind

Analysis details (09:24)

• European equities (Eurostoxx 50 -0.8%) have mostly kicked the week off on the backfoot as geopolitical concerns grip the market narrative. To recap, the weekend saw a surprise multi-front attack by Hamas on Israel which resulted in at least 700 Israeli deaths and prompted Israel to declare war on Hamas with air strikes conducted on Gaza where 400 have been killed. Oil prices rose 5% intra-day at one stage amid the heightened geopolitical risk as a report also claimed that Iranian security officials helped Hamas plan the attack; something which Iran has denied (full analysis piece available here). Closer to home, this morning’s release of German Industrial Output printed a small downside surprise printing at -0.2% in August vs. Exp. -0.1%. ING concluded that the “fourth consecutive monthly drop in industrial production is adding to fears that the entire economy has fallen back into recession in the third quarter”. That being said, it is likely that equities in the region will be more at the whim today of broader market sentiment rather than localised macro developments.


• Ahead of the Q3 European earnings season beginning, analysts at Goldman Sachs say it will be looking out for “signs of growth deterioration and whether companies’ ability to pass on costs to consumers is starting to fade”. The desk adds that earnings momentum has been neutral since the beginning of the quarter as stronger sales momentum is offset by softer margin expectations. Although a soft landing remains the view at GS, it acknowledges “the lagged impact of the rise in the cost of capital is likely to feed through to a slowdown in corporate earnings”.


• Asia-Pac stocks were mostly lower in severely holiday-quietened conditions and US equity futures were pressured amid geopolitical concerns after a surprise multi-front attack by Hamas on Israel. ASX 200 (+0.2%) was kept afloat with gains led by strength in the energy and mining-related sectors as underlying commodity prices were lifted owing to the conflict in the Middle East and the return of Chinese buyers to the market. Shanghai Comp. (-0.7%) was pressured as participants returned from the Mid-Autumn Festival and National Day Golden Week holidays, while Hong Kong trade was delayed for most of the day due to a typhoon no. 8 signal and black rainstorm warning which further added to the already thinned markets due to holiday closures in Japan, South Korea and Taiwan.


• US equity futures (ES -0.7%, NQ -0.8%, RTY -1.0%) are trading lower as global geopolitical tensions keep traders in risk-off mood following a surprise multi-front attack by Hamas on Israel. The docket is thin for today, which will leave the geopolitical tensions in focus, though traders will be mindful of several Fed speakers including Barr (Neutral), Logan (Hawk) and Jefferson (Dove), who may give their views on the recent blowout NFP report. Later in the week, the focus will begin to recentre on inflation releases (US and China) as well as central banks (Fed and ECB minutes) before banks start reporting at the end of the week as Q3 earnings season gets underway. In terms of stock specifics, Energy names such as Exxon (+2.1%), Chevron (+2.2%) and Baker Hughes (1.7%) are extending gains in the pre-market, underpinned by a rise in oil prices, where the complex saw upside following the events seen in Israel-Palestine. Additionally, the tension has hampered airline names such as American Airlines (-2.1%) and Delta (-2.2%), a similar trend also seen across European airliners.


• Ahead of Q3 US earnings season, the consensus view looks for revenue to rise +2% Y/Y, and sees 55bps of margin contraction (to 11.2%), while EPS is seen flat Y/Y. Excluding the Energy sector, S&P 500 earnings are seen growing by 5%, however. Goldman Sachs says "near-trend economic growth and moderating inflation pressures will support modest sales growth and slim margin improvement," but adds that "substantial margin expansion is unlikely given the 'higher for longer' interest rate regime, resilient wage growth, and AI investments among some tech firms."


• Equity sectors in Europe are mostly softer with Energy names the clear outperformer to the upside (and helping to bolster the FTSE 100; up 0.1%) amid the geopolitically-inspired upside in crude prices; BP (+2.3%), TotalEnergies (+1.3%). Goldman Sachs notes that a 10% increase in oil prices typically adds around 2.5pp to STOXX 600 annual earnings growth and about 10bp to net income margins as the boost to earnings of energy Co.’s tends to be bigger than the hit to other sectors from higher costs. Elsewhere, given the use of military forces in the Israel-Palestine conflict, European Defence names are firmer on the session; Rheinmetall (+6.2%), Leonardo (+5.6%), BAE Systems (+4.9%) and Thales (+4.6%). To the downside, the airline sector is reeling from the impact of higher crude prices and travel disruption in the Middle East; IAG (-4.9%), Air France (-4.2%), Ryanair (-2.9%) and Deutsche Lufthansa (-2.8%). Other lagging sectors include, Retail, Consumer Products & Services and Autos. Metro Bank (+10%) shares are seeing some reprieve from recent selling pressure after news that the Co. has agreed a rescue deal in an attempt to shore up its finances. Elsewhere in the banking sector, HSBC (-0.6%) has bought Citi’s USD 3.6bln of Chinese retail assets, as it continues to expand in the country. Croda (-5.9%) sits near the foot of the Stoxx 600 after cutting its 2023 profit outlook amid weak demand. Finally, in  M&A activity Schaeffler (-6.1%) has offered to purchase Vitesco (+20.3%) for EUR 91/shr. (vs EUR 75.35 close on Friday).

09 Oct 2023 - 09:24- EquitiesEU Research- Source: Newsquawk